Considered Opinions

Real Estate & Plan-2020
another overgrown hobby

Even though I once worked briefly as a real estate sales agent in California I have never thought of it as a vocation, hence the “overgrown hobby” reference above. Over the years I did however manage to accumulate nine individual parcels in the local area, most of them unimproved vacant land. I have sold two of those and I will describe how I went about that. To avoid using addresses, APN numbers, and other such details in the discussion I have included a table below and I will refer to the two properties discussed here simply as Valley Vista, as shown in this video. There is also an expanded map, showing these two properties and several others – just click on the thumbnail below the table.

Reference	Valley Vista		Annex		Park	Rancho	Homestead
APN	588-08-111	588-08-112	588-08-095	588-08-096	588-06-027	096-431-04	588-08-030	588-08-119A	588-08-119B
Status	Sold	Sold	WIP	WIP	WIP	WIP	Hold	Hold	Hold
County	Santa Clara	Santa Clara	Santa Clara	Santa Clara	Santa Clara	Santa Cruz	Santa Clara	Santa Clara	Santa Clara
Address	22045 Old Santa Cruz Hwy	22065 Old Santa Cruz Hwy	22197 Old Santa Cruz Hwy	22199 Old Santa Cruz Hwy	tbd Melody Lane	17430 Old Summit Road	22217 Old Santa Cruz Hwy	22195 Old Santa Cruz Hwy	22195 Old Santa Cruz Hwy
Size	1.8 acre	1.2 acre	0.8 acre	1.2 acre	0.5 acre	6 acre	2.5 acre	1.5 acre	2 acre
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I bought these two parcels (top-center on the map) many years ago at different times from different sellers. I didn’t pay very much for either because access to them at the time was problematic. They are contiguous and border on Old Santa Cruz Hwy, but in a spot where the terrain is very steep. Even though previous owners had invested considerably in design work for a driveway, it would not have been cost-effective or probably not even permittable to develop access from that direction.

It happened however that I owned other parcels nearby (yellow & gray on the map) but separated from the subject ones by three properties with houses. There was an existing easement allowing me access across one of the properties from my side, so I then negotiated a deal with the two other homeowners to pave the road leading to their homes in exchange for easements across their properties (brown on the map). That gave me free access and relieved what was otherwise a land-locked situation.

When I decided to sell the two parcels, I contacted several brokers who unhesitatingly informed me that I was crazy to think this 3-acre piece of dirt could be sold for $1 million, even though it probably could be developed into two buildable parcels with easy access and a splendid view of Los Gatos Canyon and Silicon Valley. I had no way of substantiating my conviction and, to my surprise at that time, they had no way of substantiating theirs. Unlike with houses or income properties, vacant land often has virtually no “Comps” ^[i]… real estate jargon for “comparable sales (not listings)” , so the accepted practice was and is to gather as much information as possible and exercise a lot of professional judgment from experience in the industry. This is known as taking a SWAG (Scientific Wild Ass Guess). The problem, in this case, was there was almost nothing to compare these properties to so what I got were a lot of SWAGs with no evidence of any “S” in the “G”.

Next, I talked to appraisers, only to discover that they used the same method – the only difference being that they had a printed form upon which to write the SWAGs. It was clear at that point that I would need to invest some time and effort to, (a) determine the “highest and best use” ^[ii]… real estate/appraiser talk of the property, (b) develop a method to compare it to others in the area that were likely not very similar, and (c) demonstrate the plausibility of physically and financially making it all happen. What follows is a brief review of that effort.

Zoning restrictions dictated that the only allowable use would be for single-family homes but it was not clear whether that should be one house on the combined parcels or one on each.

• Other questions included;
  • whether or not the County would allow further subdivision
  • considerations of Accessory Dwelling Units (ADUs)
  • the possibility of a lot line adjustment
  • current attitudes in County Planning/Building departments about variances, etc.

 

Those were the kind of land-use and “highest and best use” questions that needed to be answered before a fair market value could be arrived at. Understandably, none of the real estate brokers that I talked to had any interest in looking into any of that stuff so it was clear I needed to partner with someone who did or do it myself.

The following analysis is not expected to be done by a real estate broker or sales agent. It is also far beyond what should be expected from an appraiser. It is strictly meant for buyers and sellers – people who “have skin in the game”. A swing of a few thousand dollars in selling price, one way or the other, is not significant when viewed through the perspective of a low-single-digit sales commission. It is, however, a big deal for the parties to the transaction.

Santa Cruz Mountain Vacant Land Analysis

The algorithm described here, in the form of an Excel spreadsheet, is offered with the understanding that establishing the market price for any given property can only be done by bringing together a capable and willing buyer with a motivated seller, at the right time, with terms favorable to both.  No amount of analysis can change that reality but a thorough understanding of each of the property’s attributes, supported by a rational valuation of each, can help bring the two parties together more effectively.

In its current form, the spreadsheet is suited only for Santa Cruz and Santa Clara County mountain properties, but it can be easily altered or expanded to include vacant land in other areas. The theory, of course, applies to any property but in its present form, it is not useful for houses.

The analysis begins by establishing a (Baseline) value on the assumption that the parcel is or can become a legal building site, and is qualified as;

• Baseline
  • Minimum buildable (~1 acre)
  • No Scenic View
  • Typical Mountain Slope
  • Limited Sun Exposure
  • Difficult Hwy Access
  • Potential For Road Noise
  • Remote Shopping & Commute
  • Below Average Neighborhood
  • No Site Approval Investments
  • Not Possible To Subdivide
  • No Discernable Income Potential
  • Absent Owner Financing
  • No Unusual Zoning or Encumbrances

 

Next, it defines 11 primary variables (Categories) that affect that Baseline. Some are evaluated on an  A, B, C, etc. basis, while other inputs take the form of dollar value additions or discounts.

1. Acreage
   RHS zoning is generally 1-acre minimum in this area but smaller lots can often be developed if a prior legal subdivision can be demonstrated. Additional acreage adds value but not in a linear fashion. For example, the difference between 1-acre and 2-acres is far more important than the difference between 20-acres and 21-acres.
2. View
   This very subjective measure is to be observed from the proposed house location and can vary from a panorama of valley and mountain range to the neighbor’s back door.
3. Slope
   This is measured incrementally, (i.e., how much is level vs how much is too steep to be usable). In addition, the average slope of the entire parcel impacts the “Slope Density” calculation, which limits floor space.
4. Sun Exposure
   In addition to personal preference, solar power installations were soon to be required for all new residential construction.
5. Hwy Access
   Narrow or winding roads in the access route to the nearest major thoroughfare can be a significant deterrent to buyers.
6. Road Noise
   Prudent buyers will often want to visit the property to observe sound conditions during heavy traffic times (commute hours, weekend beach traffic, etc.)
7. Commuting/Shopping
   Remote locations with difficult access to shopping, public transportation, and work locations rank lower in buyer preference.
8. Location
   Quality of schools, crime statistics, quality of nearby housing, “aroma” of horses or other animals, and other undesirable use of surrounding parcels should not be ignored.
9. TBD
   Open for future use
10. Site Approval
    If County Building-Site Approval has not been previously established, the cost of obtaining it is substantial and the risk of it being denied has a strong influence on property value. The spreadsheet considers an estimate of the cost but the risk of not being able to get approval from the County is a separate issue that is difficult to put a number on
11. Adjustments
    1. Subdivision
       Whether or not the parcel can be subdivided and if so, into how many buildable parcels is of critical importance in determining the highest and best use of the property.
    2. Private Access
       The cost and feasibility of easements and driveway/private roads is often a major factor in rural properties. The spreadsheet provides a place to consider the costs but legal issues need separate consideration.
       
    3. Income Potential
       The possibility of generating income on the property from activities like Bed & Breakfast, retail sales, manufacturing, farming, or lumber harvest need to be considered and evaluated.
    4. Finance Terms
       If private financing is not available, bank financing on vacant land can be problematic, suggesting a need for a bank commitment letter.
    5. Extra Features
       This category might include waterfront, existing buildings, wells, ongoing farming operations, significant timber inventory, included personal property, special zoning, or other features of measurable value.

 

Consider this example, ^[iii]The table shown here is included merely to demonstrate the form of the algorithm – the actual numbers should be ignored. where the green headers represent the property being evaluated. In this case, the three columns represent a property consisting of two parcels evaluated as one as well as the two individually.

The blue headers are included to simultaneously evaluate up to five “Comps”, using the same criteria as the subject property. Each of the variables in the 11 Categories is evaluated for each of the properties – some being applied globally (red borders) and others specific to the property in question (green borders).

Note that there are two columns under the Global variables listing Factors and Weight for Categories 1 through 9. Factors measures variability within a particular Category and Weight adds an additional level of variability to accommodate the weighting between Categories. Weighting can be used in response to individual buyer group preference or to reflect market trends. It is recommended to confine entries in this section to a range of 0.5 to 2.0, (i.e., half to double the other Categories), as they all are subjective and transient in nature.

Also note that in the case of Categories 2 through 9, the dollar-value Adjust calculation is compounded upon the Acreage Adjust value, creating a second-order effect. This is done to reinforce the fact that the variables tend to compound each other, (e.g., the value of a “big” view is considered more valuable as the size of the parcel increases, in addition to the Baseline value).

This algorithm of course has little value unless it has been calibrated to a particular market situation. This is done by evaluating recent sales as “Comps”, with respect to each of the variables in the 11 Categories. That means personally visiting and evaluating each of the properties (green border table entries). The global variables (red borders) are then adjusted by successive approximation ^[iv]https://en.wikipedia.org/wiki/Successive_approximation until the algorithm is able to match the actual sales numbers within some reasonable Error Margin, as shown in the Summary section. The algorithm can then be relied upon to accurately estimate the true market value of the subject property. Results can be viewed graphically, using a stacked-bar format to compare various properties and a pie chart to look closely into any given property – again, ignore the actual numbers as they are dated and intended only as examples.

Summary and Conclusions

We sold the two properties for well over my $1 million target, but only after going through the Building Site Approval process, a 15-month endeavor. During that time I created several easements, designed a shared-well water system, applied for and obtained approval for two San Jose Water Company connections, and managed to get a lot line adjustment through the County Planning Commission. I relied heavily on this spreadsheet throughout the entire process. Had I not done that, the properties would have been sold for far less than their actual market value. This methodology will be used to establish listing prices for the four remaining properties.

By: Jim
Written: circa 2016-17
Published: September 2018
Revised:
Reader feedback always appreciated^[v]… thoughtful commentary perhaps more so than shallow thoughts